The Trump Tax Reform Plan: What Is and What May Be

Major tax reform enactment is a rare event with the last occurring back in 1986 under President Ronald Reagan. As a result current discussions could pan out to be much ado about nothing; however with the solid majorities that Trump and the Republicans hold in both houses of Congress there is real potential for tax reform to pass.

Timing and Certainty

The Trump administration’s goal is to get the tax changes passed and signed into law by the end of 2017. So what should you expect from a tax bill that will likely be more than 1000 pages long by the time it’s all over? Let’s take a look at some of the most notable changes widely impacting taxpayers and see. Note that these provisions are currently under debate and are subject to change between the writing of this article and the time the bill passes.

Lower the corporate tax rate by about half from the current 39.1 percent to 20 percent

Create a 25 percent business tax rate for certainpass-throughentities’ (S Corporations LLCs etc.) business income in lieu of this income being taxed as ordinary income at the individual taxpayer level

Create a territorial tax system for companies conducting business internationally along with enacting a one-time mandatory repatriation tax

Estate tax repeal

Eliminate most itemized deductions and personal exemptions

Repeal the alternative minimum tax (commonly referred to as the AMT)

401(k) Tax Deductibility Changes

In addition to these proposals there is one particularly contentious change on the docket that impacts the tax deduction related to 401(k) plans being referred to as Rothification. Rothification essentially turns your current 401(k) into a Roth 401(k) by limiting pre-tax contributions to $2400 versus the current limits of $18000 ($24000 if you are 50 and older). Plan participants are still allowed to save on an after-tax basis up to the old limits.

Looking at the numbers say you currently contribute $10000 per year into your 401(k) plan and are in the 25 percent federal and 5 percent state tax brackets. Assuming your entire contribution amount falls within these marginal tax rates you save $3000 per year in taxes. Under the new proposals you would only save $720 or a difference of $2280 (assuming your marginal tax rates are not impacted).

Trump recently tweeted that there will not be any changes to 401(k) deductions; however it was originally in the plan and could come back into play. Employers are concerned that this will discourage savings and Wall Street is terrified because managing 401(k) assets is big business.

Conclusion

The sheer magnitude of the proposed tax overhaul along with the contentious political environment means that exactly what if anything comes out of the administration’s plan is uncertain. Major changes could happen so you’ll want to work with your tax advisor to navigate any new rules.

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